Principal Issues: [TaxInterpretations translation] Can a refund of a retiring allowance or salary give rise to a deduction in the calculation of the employee's income?
Position: Yes, depending on the circumstances.
Reasons: Paragraphs 8(1)(n) or 60(n) of the Act.
July 04, 2000
XXXXXXXXXX Tax Services Office Income Tax Rulings Directorate Client Services Michel Lambert Attention: XXXXXXXXXX 2000-002209
Retiring allowance
XXXXXXXXXX
This is in response to your memo of April 19, 2000 in which you requested our comments regarding the tax treatment of a sum that XXXXXXXXXX (the “Hospital Centre”) received from some of its employees as part of a retirement incentive program.
More specifically, you asked us whether sums that employees paid to the Hospital Centre from a retiring allowance can be deducted in computing their income.
THE FACTS
You stated the following facts.
In the context of the retirement incentive program launched by the Government of Quebec in the health sector, the Hospital Centre entered into an agreement with some of its employees.
The agreement stipulates that the employee agrees to take advantage of that program and to resign on a specific date in the future. That resignation date corresponds to the date on which the employee is eligible to receive benefits from the individual’s registered pension plan (the “RPP”).
In the agreement, the employer agreed to pay a retirement allowance corresponding to a certain number of months. During that period, the employee did not work at the Hospital Centre. However, the employee had to continue to pay contributions to the RPP in order to become eligible to receive benefits on the resignation date specified in the agreement.
For this transitional period, the employer issued T4 slips with all deductions at source as if the phased retiring allowance indicated in the agreement were a salary.
From this income, there were deductions corresponding to contributions to the Quebec Pension Plan, Employment Insurance and the RPP.
The Hospital Centre's objective was to keep the cost of this program as low as possible. To do so, it included a clause stating that the employee had to refund to the Hospital Centre an amount equivalent to the sum that the employer had to pay to the RPP.
The RPP representative informed the Hospital Centre that it did not have to contribute to the RPP since the employer's portion was paid by the Government of Quebec.
Since the agreement had already been concluded with the employees, the Hospital Centre maintained the agreement stating that the employee had to refund for the value of the RPP contribution payable by the employer.
This refund was used to offset the other social security contributions that the employer had to pay (for example, the employer's share of the Quebec Pension Plan and employment insurance).
Several employees are affected, in particular natal and paediatric nurses. The latter cannot under any circumstances be rehired by another Hospital Centre because their posts have been eliminated.
The employees wish to deduct the refunds which they had to make to the Hospital Centre.
YOUR OPINION
You cannot see any legal provision that would allow the employee to deduct the amount the employee repaid to the Hospital Centre, which corresponds to the employer's share of the RPP.
QUESTIONS
Is there a legal provision that allows the refunds to be deducted?
If not, could there be a relief allowing this group of employees to deduct that amount in the tax return corresponding to the year of the refund?
OUR COMMENTS
Deductibility as a contribution to an RPP
In our view, the amount that the employee refunded to the Hospital Centre and corresponding to the employer's share of the RPP is not a contribution to an RPP since that amount was not used to fund the plan. In fact, it was the Government of Quebec that paid the employer's contributions to the RPP. In computing income, the taxpayer cannot therefore deduct that amount as a contribution to an RPP since paragraphs 147.2(4)(a) and 8(1)(m) require, in particular, that the amounts be paid into the RPP in order to qualify for a deduction.
Nature of the payment to employees
The question of whether a sum received is a retiring allowance as that expression is defined in subsection 248(1) is a question of fact that can only be resolved after an examination of all the relevant data. The Agency has already indicated that a retiring allowance may be paid periodically. However, we generally consider that a sum paid is not a retiring allowance if the employer treats those sums as employment income for the purposes of employment insurance and the Quebec Pension Plan and for establishing eligible years of service for the purposes of the employer's registered pension plan.
In view of the above, we offer you our comments depending on whether the amounts paid constitute employment income or a retiring allowance.
The amounts paid constitute employment income
If the facts show that the Hospital Centre paid an amount relating to an office or employment of a contractually determined amount, we are of the view that the employee repaid to the Hospital Centre a portion of that remuneration corresponding to the amount that the latter expected to pay to the RPP as an employer contribution. Depending on the circumstances, the employee could claim a deduction in computing employment income under paragraph 8(1)(n). Since no other provision in section 8 seems applicable to allow a deduction and since subsection 8(2) provides that only the amounts provided for in that section are deductible in computing employment income, we are of the view that the only deduction allowed would be that described in paragraph 8(1)(n).
The sums paid constitute a retiring allowance
If the facts demonstrate that the Hospital Centre paid a retiring allowance and that the employee paid part of that allowance to the Hospital Centre, in our view, the sum that was to be paid as an employer contribution to the RPP would then be a refund of part of the retiring allowance that the employee received from the Hospital Centre. Subparagraph 60(n)(i.1) allows for a deduction in the computing a taxpayer's income of an amount corresponding to the amount refunded during the year as a retiring allowance that was taxed, for the year or for a preceding taxation year, under subparagraph 56(1)(a)(ii). We are of the view that the employee could access the provisions of subparagraph 60(n)(i.1).
Please note that the deduction under paragraph 60(n)(i.1) applies even if the retiring allowance gave rise to a deduction under paragraph 60(j.1).
Access to Information
For your information, a copy of this memorandum will be severed using the Access to Information Act and will be available in the Legislative Access Database (LAD) located on the mainframe of the Canada Customs and Revenue Agency. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure, including information that could disclose the identity of the taxpayer. Should your client request a copy of this memorandum, the Legislative Access Bank version can be provided. Alternatively, the client may request a severed copy using the Privacy Act criteria, which does not remove client identity. Requests for this latter version should be made by you to Ms. Jackie Page at (819) 994-2898. A copy that has been severed in accordance with the Privacy Act will be sent to you for delivery to the client.
We hope that you find these comments of assistance.
For the Director
Financial Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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